Fortum Oyj Corp Ord

Good morning, everyone, and welcome to our joint webcasted news conference on Fortum's third quarter 2021 results. This event is being recorded and a replay will be available on our website after this event. My name is Inge Laulaves, and with me here in the studio today are our CEO, Markus Rauramo, and our CFO, Bernard Günther, who together will present our third quarter and nine-month figures. After the presentation, we will be ready to take questions from the teleconference. So with this, I now hand over to Markus to start. Please go ahead.

Thank you very much, Ingela, and good morning also on my behalf. Welcome to our nine-month 2021 results call. After a first look on the headline performance indicators, I will go to the market drivers that have played a substantial role this quarter with outstanding movements in commodity prices, especially in gas. I will link this with our overall operating performance. Additionally, I will talk about how we are progressing with implementing our strategy, and my view on our operating environment, and then hand over to Bernhard to walk you through the numbers in more detail. I start with setting the frame, looking at the headline KPIs. This quarter definitely was a rather extraordinary one, volatile, characterized by market fundamentals. At the first glance, we have a very strong group performance across the headline KPIs in the third quarter and first nine months. Starting from the balance sheet, most importantly, our leverage defined as financial net debt to comparable EBITDA has come down tremendously. We have substantially worked to strengthen our balance sheet. Following the sale of our 50% stake in Stockholm Exergi, and our district heating business in the Baltics, we are way below our set leverage target of below two times, which is paving the way for growth in clean energy and gas, as highlighted in our December capital market day. In Q3, earnings could take profit from the strong increases in energy commodity prices that are supported by the ongoing economic recovery and constrained supply, reaching multi-year and new record highs during Q3. Q3 profit was operationally strong across the segments. Nearly all business segments are up year on year and could take profit from this development. But let me also highlight that it has been a challenge for the whole organization to deal with this market development. especially when it comes to maintaining security of supply for our customers and to keep financial liquidity high in order to finance cash requirements for collaterals caused by rising prices. Those of you who have followed the Uniper call last week know that Uniper took a series of financial and operational measures, including some group support to safely navigate through this situation. To me, it shows that we are, as a combined group, even stronger than before. Those measures are also reflected in the operating cash flow that tripled in the isolated quarter and doubled in the first nine months. Bernhard will give you further insights in the financial section. Looking at the nine-month earnings figures, we see substantial increases despite the fact that there are some consolidation effects at play that must be considered. On one hand, Uniper was fully consolidated starting from Q2 last year and has been included as an associated company still in Q1 2020. Compatible EPS for the first nine months 2020 also included the Q4 2019 Uniper associated result. On the other hand, there are facing effects at work in the Uniper segment caused by the strong increase in carbon prices shifting profit into the last quarter. Even taking this into account, it has been an extraordinary quarter. To sum it up, strong group performance in a volatile commodity market with an organization giving its best, serving our customers, working closely with our suppliers, and maintaining a strong financial flexibility. Now, over to the market fundamentals. Despite recent concerns about rising inflation, and uneven access to COVID-19 vaccines, global economic recovery continues with the IMF forecasting 5.9% growth in 2021 versus 3.1% contraction in 2020. Energy commodity prices soared in Q3, supported by ongoing economic recovery and global supply constraints, especially in gas. Higher demand combined with longer-term negative investment trends and long-term, short-term supply constraints created an unprecedented price rally. In course of the autumn, the gas market moved from oversupply to tightness, and uncertainties ahead of winter sent gas prices to uncharted territory. Initially driven by supply limitations, coal prices were soaring on advancing demand recovery and bullish energy commodity complex. At the same time, CO2 prices continue to be supported by Europe's climate ambition and the EU's Fit for 55 package. Consequently, gas, coal and carbon prices underpinned the very strong price development in the European power markets. Continental power prices have given a boost to Nordic spot price, which was also supported by low precipitation and less wind available. The spread to German power prices, however, is nevertheless quite large, especially in forward prices. Besides strong wind build-out, internal transmission net and interconnector restrictions and bottlenecks had an impact on the widening spread. But next to the pure market fundamentals, there is another dimension. The high energy prices are a concern to end customers having problems to cope with their utility bills, which is ultimately increasing the risk for political interventions. Additionally, the high energy prices are a threat to the economic recovery. Looking at the forwards, the market expects the tight situation to continue throughout the winter, but forwards are at the more moderate level after the winter. For the Nordic market, my read is that the situation is by far not so severe as in continental Europe as power prices are still on more moderate levels. And because gas is not playing that often an important role in the Nordics. The gas market is the backbone for the energy supply in continental Europe. As this is a mature market and well supported by gas storages, it can normally digest major swings in supply or demand. In just one year, energy commodity markets did a 180-degree turn from oversupply to tightness. Last year's oversupply in gas was accelerated by COVID-19. But first signs of economic recovery in late 2020, early 2021, combined with the cold last winter lifted prices and future demand expectations. Then demand recovery continued, but supply continued to lag behind. In Q3, supply tightness took center stage, making upcoming winter increasingly uncertain and accelerated commodity prices. LNG supply has a major impact on EU gas prices. Europe acts as a global LNG market balancer, with imports rising strongly when the global LNG market is loose and vice versa. Strong demand in Asia and Latin America pulled volumes away from Europe this year, leaving European LNG imports 23% and 26% lower compared to 2019 and 2020. The share of LNG in European gas supply decreased from 19% in 2019 to 16% in 2021. Additionally, the long-term trend of declining domestic production continues with the planned gradual ramp down in production, particularly in the Netherlands, further tightening European gas supply. Domestic production now contributes 18% of overall supply compared to 34 10 years ago. Russian pipeline flows fell in 2020 in response to the oversupplied market and ramped up in 2021, although failing to reach 2019 levels. The share of Russian pipeline gas remains unchanged at 31% between 2019 and 2021. Norwegian supply has been relatively stable. Representing about 25% of supply, Norwegian pipeline flows to Europe were affected by heavier than usual maintenance this year. Looking at the gas storage filling levels, the tighter supply picture is also reflected in comparably low storage inventories. But please note that Uniper's storage physical filling levels are at 95% at quarter end and therefore close to prior year's level and around 20 percentage points above market average, showing how serious we are about security of supply for our customers. But the strong increase in gas prices also shows that security of supply is core, that it is not for free and that it belongs back on the European agenda. How this translates into earnings is shown on the segment split, which I will now go to. Q3 is normally seasonally a weak quarter. Looking at the isolated quarter, the overview of the compatible operating profit on a divisional level shows clearly that the year-on-year deviation is determined by our two biggest segments, generation and Uniper, especially the gas business. The main effect in the isolated quarter comes from Uniper segment's global commodities gas business that was significantly above previous year. Additionally, generation and also city solutions show a strong uplift based on good operational performance and market fundamentals. Russia and consumer solutions were netting out despite stronger underlying performance. Bernhard will give further details in his section. The overview of the nine-month comparable operating profit on a divisional level shows, in essence, again, three things. Nearly all segments have been contributing positively year on year. Uniper is the main driver for the result improvement following a strong first and third quarter, but also based on the highlighted full consolidation in Q2 2020. Generation and city solutions show a strong uplift based on strong underlying performance. What the picture does not show is that the Russian division posted a stronger underlying performance with higher prices and volumes. To sum it up, I'm very satisfied with the performance across the group. Before I hand over to Bernhard, let me give you a brief overview on where we are with our strategy execution. With our strategy, we are securing a fast and reliable transition to a carbon neutral economy by providing customers and societies with clean energy and sustainable solutions. We have defined our four building blocks in our joint strategy. Number one, transform our own operations to carbon neutral. Two, strengthen and grow in CO2-free power production. Third, to leverage our strong position in gas to enable the energy transition. And fourth, partner with industrial and infrastructure customers. So, how are we progressing with all of this? First, we are moving fast on our decarbonization ambitions. In Russia, we have been progressing to discontinue the use of coal in Fortum Russia by the end of 2022. In Q3, we closed the divestment of the Argajas coal-fired CHP that is still needed for security of supply for the region. And we will, in the next step, switch the fuel of the Chelyabinsk CHP2 unit from coal to gas. Last time at this stage, I highlighted that we have been able to announce the accelerated closure of almost 40% of our coal-fired generation capacity in Europe within less than one year. Today, I'm happy to say that we closed the group's lignite chapter in Germany with the closing of the divestment of Uniper's Skopau lignite plant. This is another major step on our way to reduce our carbon emissions in Europe by 50% until end of this decade. Gas will play a critical role in the energy transition. The decarbonization of gas will be a key element to decarbonize the energy and coupling sectors. With our gas business, we are well positioned to ensure reliable and flexible gas fired power generation to enable increasing the share of renewables in the system. Uniper has a strong position in gas midstream in Europe, including procurement, storage, trading and sales. We want to build on this position and secure increasingly clean supply of gas for heat, power and industrial processes. Natural gas will be gradually replaced with clean hydrogen. Uniper takes major steps in building a substantial hydrogen portfolio. Second, we are ramping up on renewable growth. We want to drive profitable growth without compromising on Fortum's dividend and financial strength. Fortum has been a frontrunner in creating clean energy generation for decades. We recently won a major share in the latest Russian wind auction to build 1.4 gigawatts of wind with our joint venture partner Rusnano for 2025-2027. We secured 15 years of CSA-backed contracts exceeding our hurdle rate of weighted average cost of capital plus 100 basis points. We are also progressing with our existing 1.8 gigawatts of existing projects. 1.3 gigawatts are in operation or under construction, and 500 megawatts still under development. When it comes to renewables projects outside Russia, I can say that things are moving in the right direction, but we will not compromise on our value creation targets. Third, we strengthen our balance sheet substantially. In third quarter, we close the divestments of our 50% ownership in Stockholm Exergiie, and the sale of Baltic district heating, contributing altogether proceeds of 3.6 billion euros. With these successful divestments, we have yet again demonstrated that we are constantly creating value for our shareholders and that we deliver on our strategy and our priority of maintaining a financially strong group. Our leverage of currently 0.6 times financial net debt to comparable EBITDA is clearly inside our target of below two times, underpinning our credit rating of BBB flat with stable outlook. We have good access to capital and capital markets with our liquid funds of 6.2 billion and under on credit facilities of 3.7 billion euros at the end of Q3. When it comes to how we will redeploy this capital, let me briefly reiterate what I have said last time at this stage. We are looking for balanced growth that is the triangle based on earnings power with stable and overtime increasing dividend and a stable investment grade rating of at least BBB flat that is necessary in our capital intensive industry having to secure access to low cost debt. All those elements should mutually support each other and not have one of these corners dominate. After the successful strengthening of the balance sheet, the question is where to best deploy our capital. This will be growth in clean energy and gas. Having said that, I want to address some topics regarding Uniper on the next slide. Uniper has proven to be a valuable addition to the Fortum Group portfolio. The earnings development in recent years has been strong, following the recovery of commodity prices, and Uniper has demonstrated its ability to embrace change in sync with market dynamics. We are progressing on our One Teams initiatives with determined steps. A joint organization has been established at Fortum's generation segment for the Nordic Hydro and physical trading optimization with 400 employees. The new organization will become effective in the first quarter of next year. We are also combining our forces under Uniper in developing one team for renewables and hydrogen. This is taking shape. Joint teams have been staffed and the business is being developed. As we are achieving promising initial results from cooperation so far, we have further extended this work across Fortum's and Uniper's businesses and functions. One of the latest examples is that we have joined forces in nuclear decommissioning services, which is one of the obvious collaboration fields, creating value for both companies in the combined group. So, as experience has shown, working together as one group is making us stronger, faster, more efficient and more profitable. In order to drive efficient execution of our joint strategy and value creation, we have also explored possibilities for further harmonization across the group beyond cooperation, for example, on cultural harmonization. This is a comprehensive process which will take its own time. We enter the process with no predefined outcome and will take all aspects into account. As many of you have been asking about our ownership and dividend, let me also comment on those. As you know, we have no restriction nor obligation to buy shares in Uniper. At the end of 2020, our ownership was around 76%. Since July this year, after the share price increased above the 30-31 euro level, we have not been buying anymore. On the dividends, I can confirm that Fortum Group's dividend policy is intact. Regarding Uniper, it is still premature to discuss any dividend matters, but it is certainly prudent to carefully weigh the dividend against growth ambitions, financial position, cash flow, and rating. The recent volatile market dynamics further enhance the need to carefully consider the matter. With this, I conclude my part and hand over to Bernhard for the financial section. Bernhard, please.

Yeah, thank you, Markus, and a warm welcome also from my side. As usual, I will start with a financial overview on our key comparables. As this quarter has been quite exceptional in terms of market price movements, I would additionally run through some reconciliations how the market volatility has affected our balance sheet, P&L, and cash flow. This will then be followed by the usual view on the segments, financial net debt, and outlook. So, starting with a key financial overview summarizing some indicators on the comparable level. Let me begin with the obvious. What you see here is a substantial increase across all KPIs following market fundamentals. First, looking at the isolated Q3, In the two left columns one would normally expect a slightly negative summer quarter as power generation is quite low while costs are flat and operating cash flow tends to be low as well as we build up gas inventory over the summer for the winter season. But this quarter we saw, as most of you know, extraordinary market fundamentals providing us with opportunities to optimize our portfolio. Second, The nine-month figures are not quite comparable to the 2020 ones as they are affected by the consolidation of Uniper to the income statement from Q2 2020 onwards. Consequently, the LTM column on the very right is probably the best representative indicator for the Fortum Group. From there, one can see the current level of comparable EBITDA at 3.6 billion euros, And this is somewhat above what I showed you in the previous quarters. The same applies to comparable EPS being at 1.990 per share, in essence driven by the improved market conditions. Our financial position has improved following the closing of a series of divestments that Markus mentioned before. Our credit metrics are rock solid with financial net debt to comparable EBITDA being at just 0.9 times and accordingly well below our target of below 2 times. Depending on the market development and working capital movements, in the Uniper segment, we might see some change towards year end. Having said that, let me address what is not so obvious on this slide. The strong increase in market prices gave us and especially our Uniper segment major opportunities to optimize the portfolio. This had some unusual consequences. First, the strong increase in market prices did not only impact sales, but it also impacts the fair value of our financial derivatives, which are a consequence of our hedging and risk mitigation activities. Those values went up by a factor of 10 times, tripling our balance sheet to 164 billion euros, and that's compared to year-end 2020. Second, what you can see on our balance sheet, as most of our hedges are placed as traded markets, the collateral and margining requirements we have to post have gone up substantially. Uniper faced significant variation margin calls in the third quarter. Uniper worked closely with their business as well as their financing partners to make sure that those calls and the resulting liquidity risks were properly managed. In order to achieve this in the most efficient way, Uniper relied on a broad set of tools, including commercial papers, bank loans, intra-group loans, and ultimately also operational measures within the commodities portfolio. The very high operating cash flow that you see in our numbers in the third quarter also reflects those measures undertaken by Uniper. Third, when it comes to the reported figures, the picture looks different to the comparable figures, as those changes in fair values are also reflected in the reported numbers. I will guide you through this on the next slide. What you see here is a reconciliation of the nine-month comparable operating profit all the way down to reported net profit. At first glance, this waterfall makes easily transparent that there are in essence two drivers for the mismatch in comparable and reported figures, and those are both Q3 related. None of the drivers is new to you, but the magnitude of some is unprecedented. First, there's a positive impact That's the capital gains of the closing of the divestments of our 50% stake in Stockholm XRE and of the Baltic district heating of in total 2.6 billion euros. As these are one-offs, we adjust for those. Second, another item affecting comparability is the change in values of derivatives that are used for hedging future cash flow. mainly in the Uniper segment where hedge accounting is not applied. Other fortum segments are applying hedge accounting and thus the volatility in valuation is balanced versus equity there. As commodity prices have surged, the hedge deals have significantly decreased in value. The loss from hedge instrument valuation amounts to roughly 7 billion euro for Uniper standalone. However, the corresponding value of Uniper's underlying assets like power plants or inventories is not reflected here as their book values are kept at historic cost under IFRS. This mismatch is only temporary and will resolve over time as the position settles. Therefore, it is expected to revert. Consequently, at this stage, nine-month operating profit is negative with 2.6 billion euros. Including associates and finance costs, the nine-month profit before income tax is negative at 2.4 billion. Please note, as Stockholm XRE has been divested, the associated result will be correspondingly lower going forward. Finance costs include interest expenses on our loans, but also the accrued interest income from Nord Stream 2 for Uniper. Income tax is significantly positive as a consequence of the recorded fair value losses. Now over to cash flow on slide number 13. The strong increase in market prices brought funding requirements for collateral and margining to extreme levels, as most of our hedges are typically placed at traded markets. Hedges are necessary to reduce the price risk and to have predictable cash flow and earnings over time. A certain volatility in margining receivables and liabilities is therefore part of this and normal course of business. With commodity prices and their volatilities reaching unprecedented levels, the corresponding margining requirements for the Dunn hedges have gone up substantially, especially Uniper faced significant variations in the margin calls over the last weeks. This is reflected in the change in margin receivables, in the net cash from investing activities, and in the change in margin liabilities in the net cash from financing activities. Uniper worked closely with their business as well as their financing partners to make sure that those calls and the resulting liquidity risks were properly managed. In order to achieve this in the most efficient way, Uniper relied on a broad set of tools. This includes commercial papers and bank loans reflected in the change in short-term liabilities bringing financing cash flow up, but also operational measures within the commodities portfolio having a positive impact on the change in working capital and ultimately on the operating cash flow. Consequently, the very high operating cash flow that you see in our numbers in the third quarter does also reflect those measures undertaken by Uniprom. Therefore, please do not extrapolate the figure to the full year. And ultimately, Fortum was always able to provide intra-group loans to help through this extreme situation. For me, this is another example that a close collaboration between Fortum and Uniper makes us even stronger as well as more profitable and shows the advantage of being one group. Now over to the segments. Let's start with generation. Comparable operating profit in Q3 increased by an outstanding 80%. This is the highest third quarter generation result since 2012. The result improvement was supported by the higher achieved power price of 43.7 EUR per MWh with very successful physical optimization and higher spot price. While the system spot price increased up to 68.3 EUR per MWh, the fairly high hedge levels and the hedge price below the level of the spot price dampened the effect on the achieved price. Higher hydro and nuclear volumes also contributed positively to the improvement. Let's now have a look at the development of the hydro situation on the next slide. In Q3, Nordic hydro reservoirs have been below average levels following low precipitation from the summer that continued in Q3 and led to a significant deficit in water reservoirs of 80 TWh below long-term average. And please remember that the year started with a significant reservoir surplus of around 20 TWh, following a very wet 2020. The trend of low precipitation and low wind speeds has persisted broadly throughout the first nine months of 2021, and we are still below average reservoir level. This development in context of high continental European power prices had a major influence on Nordic spot prices with high volatility considering that new interconnectors to Germany and the UK have been taken in use during the last 12 months. Looking at the forward curve, the development has been quite volatile. Forwards saw strong gains until mid-September, but change in weather forecasts dropped prices back to the August level. Now coming to our Russia division. Russia is showing a solid underlying performance, especially on the isolated Q3. Power generation volumes increased due to higher consumption following the economic recovery from the COVID-19 pandemic. Comparable operating profit for Q3 was up 13% to 45 million euros. The effect of the change in Russian ruble exchange rate was plus 4 million for the isolated quarter. and the net effect of the changes in CSA payments was slightly negative. Three units were entering the four-year period of higher CSA payments, while the CSA period ended for the TUM and CHP1 and Cheryabinsk CHP3. Additionally, we saw some corrections to the CSA prices due to lower bond yields. On the nine months, the comparable operating profit improved marginally. We saw higher power prices while there was a slight negative effect from the CSA. And please recall that there was a positive effect from the solar transaction with REIF in Q1. The nine-month ruble effect was minus 19 million euros, so in ruble terms there was a clear improvement in our Russian business. Now to city solutions. Our comparable operating profit was negative. in Q3 but improved clearly compared to the previous year following higher power prices. Almost all business areas improved from the previous year, especially in the areas of waste and metal recycling businesses. There was a slight positive result effect of the structural changes from the divestment of the district heating business in the Baltics as the result of district heating and cooling business typically is negative in the third quarter. Operating profit was affected by the tax exempt capital gains on the sale of the 50% ownership in Stockholm XE and the sale of the district heating business in the Baltics. As you know, this was very beneficial for the group's debt factor. On the nine-month numbers, heat sales volumes increased by 6% and power sales volumes increased significantly, mainly supported by a different production mix in the finish heat business in the first quarter and the commissioning of a new solar power plant in India. Comparable operating profit increased tenfold as a result of higher heat sales volumes in all heating areas, higher power prices and higher Norwegian heat prices due to the price link between heat and power prices there. We are happy to see an improvement in our city solution segment after a tough year 2020 that was both affected by mild weather and low prices and also by the COVID pandemic. Now coming to consumer solutions. In consumer solutions, we after a comparable EBITDA improvement in 15 consecutive quarters are now facing a challenging market environment with negative impacts of the rapidly increasing electricity market prices combined with tough competition in the Nordic market what ultimately resulted in a reduction in number of electricity customers during the third quarter. This could not be offset by the positive impact from value-added services, resulting in a comparable operating profit decrease by 28% quarter-and-quarter. On the nine months, comparable operating profit is nearly flat, mainly driven by the lower number of customers and some negative impact of the rapidly increasing electricity market prices during the third quarter. This was partially compensated by increased unit margins coming from active development and improvement of our service offerings. The strategic review of the business announced in December 2020 is ongoing. And now, last but not least, to Uniper. As Uniper published their results last week, we can state some obvious general comments. Again, please note that Uniper has been included as associate in Q1 2020, giving some distortions when it comes to the first nine months comparison. This holds true not only for the shown earnings, but also for the volumes. Overall, I want to highlight that Uniper's underlying performance has been very solid. When looking at Q3 2021, we see an extraordinary positive effect from the trading business, with Uniper upgrading the full year guidance. Earnings at the European generation surpassed the prior year figure. The business benefited above all from the commissioning of Dutland IV coal-fired power plant in late May 2020, and the return to commercial operations of Ershing 4 and 5 gas fire generating units. They also benefited from higher income from the UK capacity markets, but suffered from the unavailability of Maasvlakte 3. A significant year-on-year earnings increase at global commodities is principally attributable to the gas business benefiting from volatile rising prices in the current financial year. Additionally, higher earnings from the international portfolio have been supportive this year as well. Earnings at Uniper's Russian power generation were at the prior year level. And now over to financial net debt. Here you find the changes in our financial net debt and main items of our cash flow during the first nine months of 2021, showing two major items impacting financial net debt. First, we highlighted cash flow from operating activities that includes partly cash flow management activities to secure financial flexibility in the rising commodity complex that we saw this quarter. And second, the divestments made. Additionally, you see investments made of above 1.1 billion euros and dividends paid in similar size to fortum shareholders or minorities. With regards to the leverage target of financial net debt to comparable EBITDA of below zero, we currently stand at 0.9, underlining our rock-solid credit metrics. We have currently 11.7 billion euros of gross debt and average interest rate for this whole loan portfolio is 1.3%. And please bear in mind that Uniper has also some interest income from their operations. Now, looking at the loan maturity profile, this might appear a bit front-loaded, but please note that the increase in short-term liabilities is linked to our cash reserves as we wanted to increase our financial flexibility in this extreme commodity market situation. And you see... Our liquidity position is very solid with liquid funds of approximately 6.2 billion euros. Additionally, since the 13th of September, we have rolled over 1.3 billion euros from the year 2021 to 2022. Maturities in 2021 also include loans of some 660 million euros with no contractual due date. Now, finally, coming to the outlook. Our successful hedging has continued creating predictability and visibility. And you can see also here again the Uniper Nordic hedging numbers below the fortum generation area. Regarding capex for 2021, we repeat what we've already communicated. Our total group capex is estimated to be 1.4 billion euros for the whole year with maintenance around 700 million. And please bear in mind that there may be always a bit of volatility between the years as we have not provided guidance for the normalized maintenance capex going forward. With this, I conclude our presentation and we are now ready to start the Q&A session. Ingela, over to you.